Ministerial meddling in banks part-owned by the State will make it harder to return lenders to the private sector, a damning report by MPs states today.

In the long-awaited Treasury Select Committee report into the banking crisis, MPs said that they had no confidence in UK Financial Instruments (UKFI), the agency that controls the Government’s holdings in distressed banks, because it lacked real independence.

The committee, which is made up of MPs from the three main parties, laid the blame squarely at the Treasury’s door for restricting the agency’s independence. In the 124-page document, the second part of a three-part report, the committee urges UKFI to move out of the Treasury building and recommends that Alistair Darling detail the amount and type of power the department wields over the group.

The report said: “The Treasury has constrained UKFI’s discretion by introducing a power of discretion to be used if UKFI strays too far from the Treasury’s wishes. Certain aspects of UKFI’s institutional arrangements do lead us to wonder just how ‘arm’s length’ UKFI actually is from the Treasury.”

It added: “While the current ad hoc administrative arrangements persist, we have no confidence that UKFI will have the real operational independence that is necessary. We do not think it is in the national interest for UKFI to remain so enigmatic a body.”

The scathing attack on UKFI comes only weeks after the committee questioned John Kingman, the Treasury mandarin who has been seconded to run the agency.

UKFI was created to house the State’s shareholdings in Britain’s bailed-out banks and to ensure that the taxpayer gets a decent return on its investment once the lenders are sold back to the private sector. The committee, chaired by John McFall, also urged UKFI to devise and publish its strategy for the timing and mechanism of the sale of the banking stakes.

A spokesman for UKFI said: “We welcome the committee’s report and its view that the Government’s investments in UK banks should be managed at arm’s length. We will consider all the committee’s recommendations carefully and respond in due course.”

The MPs also issued a warning to Sir Victor Blank, chairman of Lloyds Banking Group, arguing that should the merger of his bank and HBOS prove to have damaged Lloyds, blame could not be deflected elsewhere.

The comment is a clear reference to bankers who have argued that the lender was bounced into bailing out HBOS by Gordon Brown. The committee also gave a clear hint that it would be calling for some type of curb on executive pay, such as urging regulators to ban “golden goodbyes”, whereby executives are paid to leave the company. It said: “Rewards for failure must not be repeated. We will address this and other aspects of regulation in forthcoming reports.”

The report excoriated of the City, accusing bankers of failing to understand many of the complex securities that lenders owned, of stifling contrary opinions, and of making “an astonishing mess of the financial system”.

While the committee does not have the power to force banks or regulators to change their behaviour, its remit allows it to make recommendations to the Government for new legislation.

The committee indicated that it would examine the feasibility of forcing banks to slice themselves up into retail and investment banking arms to try to reduce the amount of systemic risk triggered by the collapse of another lender. It also said that it would examine the role of financial advisers in the banking meltdown.

But Vince Cable, Liberal Democrat Treasury spokesman, said that the MPs’ report was “disappointingly weak”, adding: “It fails to meet the previous standards of tough criticism advanced by the select committee when interrogating the bankers.”

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